The divide between retail property and industrial space in the North East is growing, according to the Q1 2018 RICS (Royal Institution of Chartered Surveyors) UK Commercial Property Market survey. The weakness in retail appears to be spreading across prime locations, with a challenging backdrop being reported across the whole of the UK.
While 20% of commercial surveyors in the North East noted an increase in occupier demand for industrial property in the first quarter of the year (Q1 2018) – up from 8% in the last quarter of 2017 – demand for retail space in the region not only declined further, but at an accelerating rate. A net balance of 46% of respondents saw a fall in demand for retail property, which is the weakest reading in a decade.
Barry Nelson of Northern Trust Company Ltd in Durham said: “Demand for small industrial units in Durham city, North Durham and the North-West Durham areas remains very strong, but demand in the south of the county is weaker. Refurbished mid-sized space is generating interest but is generally slower to move.”
As demand for retail property dropped, availability in the sector rose significantly during Q1 2018, with 52% more respondents noting an increase in available retail space in the region (up from 17% in Q4 2017). Consequently, nearly half of retail landlords (48%) offered incentive packages to entice clients during the first quarter of the year (up from 22% back in Q4 2017).
Looking at rent growth expectations over the next 12-months; 37% more respondents in the North East predict a fall in retail rents, while the outlook for industrial rents appears comfortably positive with 39% expecting rents to rise over the coming year ahead. The outlook for offices in the region over the next 12-months is also positive, with 38% of commercial surveyors in the North East anticipating a rise in office rents over the next 12-months.
Furthermore, looking at the sector in more detail, secondary retail rents are projected to decline in all parts of the UK – including the North East – over the coming year, while the outlook is patchy at best for prime retail sites. Both prime and secondary industrial markets continue to display stronger rental projections over the year than all other sectors.
David Downing MRICS of Sanderson Weatherall LLP in Newcastle upon Tyne commented: “The prime investment market in the North East is very hot at the moment, with several transactions setting new record low yields – levels below those achieved in 2006. There is a huge weight of money out there looking to invest in prime property and this seems unlikely to change until returns from other forms of investment begin to recover.”
Simon Rubinsohn, RICS Chief Economist adds: “It has been hard to escape the grim news from the high street in recent months with a whole host of well-known names either closing down or looking to scale back their footprint. The results from our latest survey of chartered surveyors suggests that this challenging environment is unlikely to let up anytime soon.
“Indeed, the feedback regarding what may be described as secondary retail locations points to further falls in rents over the coming year with landlords under pressure to increase ‘sweeteners’ to keep tenants in place. The flipside of this is the positive trend in high quality well located logistic/industrial sites which continue to be sought after by both potential occupiers and investors despite recent price moves. Indeed, the likelihood is that the more desirable locations will get even more expensive as the change in our shopping habits continues to advance.”